The Opportunity Cost to Active Investing

It has been about one year since I have purchased my first stock and since then I have learned many things about active investing.

As I have mentioned before, I am one of those people who like to dive right into something and piece the puzzle together myself instead of following a manual. This is what I have done when it came to my investments.

I started off purchasing stocks from well-known companies that intrigued me. When I figured out that this was the wrong approach to investing, I began looking into some technical aspects such as the P/E ratio, EPS, yield and 52 week range.

From there, I entered a dividend phase where I got obsessed with high yield dividend aristocrats. Although this was definitely a level up from buying random stocks, I still felt as if this wasn’t the right move for me.

This is why after taking a deeper look at my portfolio goal, I have decided to return to investing passively through low MER index funds and ETFs. Here are my reasons in doing so:

Not enough time to do a thorough research

As someone who works 40 hours a week and very little energy left over after work, I do not have the time to increase my knowledge in active investing at the present moment.

Exposure to a diversified portfolio

Recently, I have been taking a closer look at how my portfolio is distributed through the various sectors and as it turns out, my portfolio isn’t as diversified as I would like it to be.

Instead of trying to purchase stocks from every sector, investing in a well balanced index fund will give me the exposure that I want.

Index out performs the average investor

It is a fact that the index fund will probably out-perform the average investor.

Since my investment in the S&P 500 one year ago, my index fund has returned a total of 20% while my stocks have returned 6%.

Cutting down on expensive commission fees

Investing in a few index funds and ETFs instead a large amount of stocks will cut down on the commission fees. However, the trade-off will be the MER that comes with owning the index.

More difficult to manage

There will be no more need to hold and track 30+ stocks in a portfolio that have a total asset of under $50,000.

For smaller portfolios, the index will give you a piece of all the stocks you would want to have in your portfolio at a more discounted price.

My Plan Moving Forward

Since now that my portfolio is allocated in 80% stocks and 20% index funds, I will be slowly transitioning it to the exact opposite. The plan is to hold 80% index funds and 20% stocks.

For the 20% of my portfolio dedicated to stocks, I will only look to invest in stocks that I believe will yield a 20% growth within a one year time frame.

This will give me the practice that I will need to slowly transform my portfolio to one that will out-perform the index.

Hopefully this change to passive investing will better align my portfolio to meet my goals for 2015.

What do you think of my strategy? Do you agree or disagree with it? I would love to get your input in the comments.

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14 Responses to “The Opportunity Cost to Active Investing”
  1. Tawcan January 27, 2015
  2. Jeff January 27, 2015
  3. VIvianne January 27, 2015
  4. Jeff January 27, 2015
    • vIVIANNE January 30, 2015
      • Jeff January 30, 2015
  5. Henry - Living At Home January 28, 2015
    • Jeff January 28, 2015
  6. debt2retirement January 28, 2015
    • Jeff January 28, 2015
  7. No More Waffles January 29, 2015
    • Jeff January 30, 2015
  8. M January 30, 2015
    • Jeff January 31, 2015

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